The US debt outlook is increasingly vulnerable to rising bond-market costs, Scope Ratings has warned after maintaining the country’s sovereign credit score at AA-.
The Europe-based agency kept its outlook stable on Friday, but said persistent spending pressures and limited political willingness to pursue fiscal reform would push deficits higher. Its rating is three notches below the top grade and two levels below the AA+ ratings assigned by Moody’s, Fitch and S&P Global Ratings.
Scope said the US retained significant strengths, including a powerful economy, the dollar’s status as the world’s reserve currency, strong institutions such as the Federal Reserve, and the deepest and most liquid capital markets.
However, it said interest payments would drive further deterioration in the public finances even as the primary deficit – which excludes interest costs – remained broadly stable at about 3.5% of gross domestic product.
The yield on the 10-year Treasury has reached 5.27%, well above long-term projections from the Congressional Budget Office of 4.3% between 2028 and 2031 and 4.4% from 2032 to 2036.
The Committee for a Responsible Federal Budget has estimated that yields remaining roughly one percentage point above CBO projections would add about $3.5 trillion to US debt over the next decade.
Scope said the rising cost of servicing the debt was reducing the government’s capacity to respond to future economic shocks. Without stronger growth or a substantial fiscal adjustment, general government debt could approach 160% of GDP by 2036, it said.
“This trajectory points to an unsustainable medium-term fiscal path and leaves the sovereign increasingly exposed to shifts in market sentiment and financing conditions,” Scope said.
Shorter-term debt increases refinancing risk
The Treasury has been shifting the composition of its borrowing towards shorter-term maturities and away from longer-dated bonds, which carry higher rates. Treasury Secretary Scott Bessent has continued a strategy begun under the Biden administration and expanded it through buybacks involving the issue of more short-term notes to retire longer-term debt.
That approach leaves more government borrowing needing to be refinanced sooner. The cost of rolling over the debt rises when Treasury yields increase, as they have in recent months.
Price-sensitive hedge funds have also become larger participants in the $32 trillion Treasury market, replacing foreign central banks, which had been more stable holders of US government debt. Scope said the change had added to market volatility.
The debt ceiling presents a further risk. Scope expects the current $41.1 trillion limit to be reached by early 2027, although the Treasury can use so-called extraordinary measures to prevent a default for several months.
Lawmakers would ultimately have to raise or suspend the ceiling. Scope said its baseline assumption was that they would do so, but warned that the political landscape after the midterm elections could lead to prolonged partisan disputes.
“Repeated debt-ceiling episodes continue to highlight weaknesses in fiscal governance and contribute to periodic market volatility,” the agency said.
The warning came as the federal government’s fiscal year ended on Wednesday and fiscal 2027 began on Thursday. The Committee for a Responsible Federal Budget said the previous year closed with a $2 trillion deficit, equal to 6.2% of GDP.
Publicly held debt stood at $32.3 trillion, or 100% of GDP, while interest costs reached a record $1.1 trillion. At 3.4% of GDP, interest was the second-largest line item in the budget, exceeding spending on defence and Medicare.
“Based on evidence from the past year, we now expect much higher interest payments and lower tariff revenue going forward, which could send deficits and debt surging well beyond [CBO’s] projections,” the committee said.
